What is Loan Forbearance?

Loan forbearance is the phrase used to describe the temporary deferral of debt payments, usually for a mortgage or school loan. Instead of putting a house up for foreclosure or letting the borrower default on the loan, lenders and other creditors provide forbearance. Because they often carry the losses associated with foreclosures or defaults, lenders and their insurers are frequently open to negotiating forbearance agreements.

Key points

• Instead of putting a borrower at risk of foreclosure or default, a lender may provide a borrower forbearance, which is a temporary delay of loan payments.
• The borrower and the lender bargain over the details of a forbearance agreement.
• The borrower must provide evidence of why payments must be delayed, such as financial hardship brought on by a serious illness or the loss of a job.
• Mortgage borrowers who are impacted by COVID-19 and whose loans are supported by government programs may be eligible for relief.
• Borrowers with federal student loans are eligible for forbearance until the earliest of 60 days after June 30, 2023, or 60 days after the conclusion of the legal action preventing President Biden’s student loan forgiveness program.

Forbearance is a choice for any loan, even though it is frequently utilized for mortgages and school loans. It extends the debtor’s time to make good on their obligations. This benefits the lender, who typically loses money on foreclosures and defaults after paying the costs, as well as the suffering borrowers. Because they do not incur as much financial risk, loan servicers—those who collect payments but do not own loans—might be less eager to cooperate with borrowers on forbearance relief.

Borrowers and lenders bargain over the details of a forbearance agreement. The possibility that the borrower will be able to resume regular monthly payments after the forbearance period is finished affects the odds of securing an agreement. Depending on the amount of the borrower’s need and the lender’s belief in the borrower’s capacity to make up the missed payments in the future, the lender may allow a full reduction of the borrower’s payment or simply a partial reduction.

The lender may occasionally provide the borrower with one of a few options. These consist of the following:

• A complete suspension of payments for a period of time
• The borrower’s requested to pay interest but not pay down the principal
• In practice, known as negative amortization, the borrower only pays a fraction of the interest, with the remaining amount being added to their overall debt.

The law may require forbearance. For instance, provisions for student loan forbearance were included in the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was passed and signed into law in 2020 to address the economic effects of COVID-19.

During the epidemic, some state governments also passed laws relating to forbearance. The bill also included opportunities for struggling homeowners to postpone mortgage payments throughout the pandemic.

How to Request a Forbearance

To request a deferment on their mortgages or student loans, borrowers should get in touch with their lenders or loan servicers. They will typically need to provide evidence of a need to defer payments, such as financial hardship brought on by a serious illness or loss of employment.

Lenders have a lot of freedom when selecting whether or not to grant assistance and how much when forbearance agreements are negotiated.

An excellent candidate after being laid off, for instance, is a borrower who has worked for the same business for ten years without ever having missed a mortgage payment. If this borrower is highly skilled and can find comparable employment within a reasonable amount of time, they would be especially likely to be granted forbearance. If a borrower has a patchy work history or a history of late payments, the lender is less inclined to provide forbearance.

The lender may also choose to temporarily lower the interest rate for the borrower as a kind of forbearance.

Student Loan Forbearance under COVID-19

Beginning with the news that the U.S. Department of Education’s Federal Student Aid office would suspend loan payments, set interest rates to 0%, and freeze collections on defaulted loans, forbearance assistance became a part of COVID-19 legislation and administrative measures in March 2020.

In response to the COVID-19 pandemic and a campaign promise made by President Biden, this forbearance program offers temporary relief from federal student loan debt.

When that happened, borrowers with qualifying loans were automatically put into administrative forbearance and were not required to make monthly loan payments until the program ended, which was set to happen 60 days after June 30, 2023, or 60 days after the White House’s student loan forgiveness program was settled in any pending legal action, whichever came first.

The Department of Education announced in March 2021 that as part of the COVID-19 relief, forbearance would also be granted for any defaulted Federal Family Education Loan (FFEL) Program debts made by private lenders.

Even since COVID-19 statutes do not allow forbearance on private student loans, certain private lenders may still provide forbearance on their own.

Mortgage Forbearance under COVID-19

Consumers now have access to aid with mortgage forbearance thanks to the CARES Act. All mortgages that are sponsored or supported by the federal government are subject to COVID-19 mortgage forbearance. Included in this are loans supported by the following:

• Office of Housing and Urban Development, United States (HUD)
• Government housing agency (FHA)
• Farm Service Agency of the United States (USDA)
• American Veterans Affairs Department (VA)
• Freddie Mac
• Fredy Mac

The statute allows for an initial forbearance period of up to 180 days and an additional extension of 180 days.

The window for obtaining an initial forbearance has been extended until the COVID-19 National Emergency is over if your loan is insured by HUD/FHA, the USDA, or the VA. There is no deadline to request an initial forbearance if Fannie Mae or Freddie Mac backs your loan.

What Follows After Forbearance?

The borrower is in charge of making up the missed payments once the forbearance period has ended. The borrower and the lender frequently collaborate to develop a strategy for making up missed payments. The borrower is never compelled to make all of the postponed payments at once if Freddie Mac owns the loan. Remember that this could not apply to other lenders.

The borrower can be responsible for accruing interest during the forbearance period as well as potential late penalties, again depending on the parameters agreed upon with the lender.